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Earnings Preview: Akamai Tech - Analyst Blog

Akamai Technologies Inc.
(
AKAM
) is scheduled to release its fiscal fourth quarter 2011 results
after the closing bell on February 8, 2012. In the run up to the
earnings release, we have noticed positive movement in analyst
estimates.

Recap of Third Quarter

Though Akamai's third quarter earnings missed the Zacks
Consensus Estimates, EPS logged an increase of 8.7% from the
year-ago quarter. The year-over-year growth was primarily driven by
strong revenues; partially offset by higher expenses, which dragged
down margins in the reported quarter.

Akamai's top line was up 11.2% on a year-over-year basis and
surpassed the Zacks Consensus Estimate. The better-than-expected
result was primarily driven by continued solid growth for value
added solutions.

For the fourth quarter, Akamai expects revenues in the range of
$303.0 million to $315.0 million (6% to 11% year-over-year growth).
The favorable foreign exchange rate is expected to have an impact
of approximately $2.0 million on a year-over-year basis. The Zacks
Consensus Estimate is pegged at $311.0 million.

EPS is expected to be between 37 cents and 41 cents, including
tax charges of $25 million to $30 million, based on a full-year
GAAP tax rate of about 36%. Currently, the Zacks Consensus Estimate
(including stock-based compensation) for the fourth quarter is
pegged at 31 cents per share, well below the guided range.

Akamai expects gross margins to remain flat on a sequential
basis. For the quarter, Akamai expects operating expenses to
increase approximately $10.0 million year over year. Akamai expects
adjusted EBITDA margin in the range of 43% to 44%.

Akamai forecasts capital expenditure (excluding equity-based
compensation) of approximately $50 million for the forthcoming
quarter. For fiscal 2011, capital expenditure is expected to be 16%
of revenues.

Estimate Revision Trend

In the last thirty days, out of the 17 analysts covering the
stock, one analyst has raised estimates while none of the analysts'
estimates moved the other way. However, the Zacks Consensus
Estimate for the fourth quarter remained at 31 cents per share.

For fiscal 2011, the Zacks Consensus Estimate is pegged at $1.15
per share.

The analysts covering the stock are positive about Akamai's
market share (approximately 60%) in the Internet content delivery
market. Moreover, analysts expect Akamai to report a decent quarter
on the back of strong e-commerce and value-added services.
Additionally, increase in online spending, coupled with newer
additions of clients and strong advertising trends are expected to
be the key drivers going forward.

However, contrarian views from another set of analysts suggest
that Akamai will face revenue pressure in the first half of 2012
due to the aggressive pricing by the company to get it in line with
Level 3 Communications Inc.
(
LVLT
) and
Limelight Networks Inc.
(
LLNW
). Akamai had commanded a premium to the market price and had
slashed its pricing for the services to secure more deals.

Recommendation

Akamai's positive earnings surprise for the past four quarters
averages at a modest 3.6% and for the current quarter we expect the
company to beat the Zacks Consensus Estimate by the same
magnitude.

We believe that increased usage of cloud computing technology
ensures higher adoption of value-added solutions, which will drive
strong top-line growth going forward. Moreover, strong demand for
security products, aggressive share repurchase and strategic
partnerships are positives for the stock over the long term.

However, weak traffic growth remains a concern, as Akamai
continues to face intense pricing pressure from competitors like
Level 3 Communications, Limelight Networks, Inc. and carriers such
as
AT&T Inc.
(
T
) and
Verizon Communications
(
VZ
), who are developing their own content delivery network. We
believe this will hurt revenue growth going forward.

We maintain our Neutral recommendation on a long-term basis
(6-12 months). Currently, Akamai has a Zacks #3 Rank, which implies
a Hold rating on a short-term basis.

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